42
I i'FINANCIi).L CONSTMINTS TO TMDE' ANI} GROWTll. - Tlll.! CRISIS ,AND ITS AFTERMl'!TlI; (FOREIGN AGRICULTUML ECO,,!OMIC REP-r.) I $I 'I .' D. SHANE, ET AL •. ECONOMIC RESEARCH SERVICE, WASHINGTON, INTE RNi).TIONAL ECONOMICS DIV. ,DEC A4 ,qp

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FAER~211 iFINANCIi)L CONSTMINTS TO TMDE ANI GROWTll -Tlll ~~~~~ PElEl~l CRISIS AND ITS AFTERMlTlI (FOREIGN AGRICULTUML ECOOMIC REP-r) I $I I

D SHANE ET AL bull ECONOMIC RESEARCH SERVICE WASHINGTON pC~ INTE RNi)TIONAL ECONOMICS DIV DEC A4 qp

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PB85-l598l2

Financial Constraints to Trade and Growth The World Debt Crisis and Its Aftermath

(us) Economic Research Service Washington DC

Dec 84

--- ~ JjI

50272-1011 REPORT DOCUMENTATION 11 REPORT NO

PAGE FAER-2ll 1~ 3 Recipients ACCflslon No bullbull TItle end Subtitle ~~g 5 r 59 er2famp$

bull Financial Constraints to Trade and Growth TIle World 5 Report DateDept Crisis and its Aftermath bull DecpmhpT 1994

s7 Author(s) Mathew D Shane and David Stallings L Performi Orpnlzatlon Rept No9 Performl Orpnlzetlon Nemo end Adds FAER-11

International Economics Division 10 rveetlTesklWorlc Unit No

Ecanomic Research ServiceUS Department of Agriculture

u Contreet(C) or Grent(G) NowashingtonI5C-20250~ (C)

1~ Sponsorinl Orpnlutlon Neme Ind Add

(G)

13 Type of Report amp Period Covered

14 15 Supplementery Not

16 Abstract (Umit 200 _rdl)

The debt problems of developing coootries will severely limit their abUity to purchase goods inthe world market for at least the nerc 5 years Resolutions of these debt problems couldincrease potential US agrlccttural exports by as much as 20 percent The large debts of thedeveloping C01mtries became serious problems with the shifts to tighter mOnetary policies by the-developed countries in the late seventies Clpound1thonsequehl stuwirrgvt1nfla-ttonatiu-creCiitfiowsEighteen countries which are major markets for US agriculture hold more than 60 percent ofthe problem debt Both current debts and national economic policies in the developing countries

must be restructured to begin the ~trengthening of those countries economies Developedcountries can help the economic recovery of developing nations by providing markets for theirexport commodities-

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International trade Foreign TradeExports GrowthPrices

Surveys b IdentlfleIOpenmiddotEnded Terms

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FINANCIAL CONSTRAINTS TO TRADE AND GROWTH THE WORLD DEBT CRISIS AND ITS AFTERMATH by Mathew D Shane and David Stallings International Economics Division Economic Research Service US Department of Agriculture Foreign Agricultural Economic Report No 211

ABSTRACT

The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next s years Resolutions of these debt problems could increase potential US agricultural exports by as much as 20 Iercent The large debts of the developing countries became serious problems with the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~ng of those countries economies Developed countries can help the economic recovery of devel0ping nations by providing markets for their export commodities

Keywords InternJtional debt trade growth financial constraints to trade developing countries US agricultural exports US agricultural trade policy

Acknowledgment The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work We also acknowledge the valuable comments and suggestions of Vernon Roningen Cecil Davison Tom Vollrath of the Division and Robert Thompson Terry Roe and Phil Abbott in the profession The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted The authors retain responsibility for any remaining errors We also want to thank Jamesena George who typed the manuscript

PREFACE

Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981 In preparation for these deliberations the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s This report is part of a series of background papers for 1985 farm bill discussions Other papers in the series explore the characteristics of 14 commodities the farm industries which produce them and the farm program under which they are produced These papers available from EMS Information 1470-S USDA Washington DC 20250 (202447-7255) focus on Honey (AIB-465) Wool and Mohair (AIB-466) Wheat (AIB-467) Tobacco (AIB-468) Peanuts (AIB-469) Rice (AIB-470) Corn (AIB-471) Soybeans (AIB-472) Oats (AIB-473) Dairy (AIB-474) Sorghum (AIB-475) Cotton (AIB-476) Barley (AIB-477) and Sugar (AIB-478) Other background papers available are Federal Credit Programs for Agriculture (AIB-483) History of Agricultural Price-Support and Adjustment Programs 1933-84 (AIB-485) Foreign Exchange Constraints to Trade and Development (FAER-209) Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526) and Impacts of Policy on US Agricultural Trade (ERS Staff Report No AGES840802)

WASHINGTON DC 20250 DECEMBER 1984

i ) i

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

ii

I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

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--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 2: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

I

- - - _shy

PB85-l598l2

Financial Constraints to Trade and Growth The World Debt Crisis and Its Aftermath

(us) Economic Research Service Washington DC

Dec 84

--- ~ JjI

50272-1011 REPORT DOCUMENTATION 11 REPORT NO

PAGE FAER-2ll 1~ 3 Recipients ACCflslon No bullbull TItle end Subtitle ~~g 5 r 59 er2famp$

bull Financial Constraints to Trade and Growth TIle World 5 Report DateDept Crisis and its Aftermath bull DecpmhpT 1994

s7 Author(s) Mathew D Shane and David Stallings L Performi Orpnlzatlon Rept No9 Performl Orpnlzetlon Nemo end Adds FAER-11

International Economics Division 10 rveetlTesklWorlc Unit No

Ecanomic Research ServiceUS Department of Agriculture

u Contreet(C) or Grent(G) NowashingtonI5C-20250~ (C)

1~ Sponsorinl Orpnlutlon Neme Ind Add

(G)

13 Type of Report amp Period Covered

14 15 Supplementery Not

16 Abstract (Umit 200 _rdl)

The debt problems of developing coootries will severely limit their abUity to purchase goods inthe world market for at least the nerc 5 years Resolutions of these debt problems couldincrease potential US agrlccttural exports by as much as 20 percent The large debts of thedeveloping C01mtries became serious problems with the shifts to tighter mOnetary policies by the-developed countries in the late seventies Clpound1thonsequehl stuwirrgvt1nfla-ttonatiu-creCiitfiowsEighteen countries which are major markets for US agriculture hold more than 60 percent ofthe problem debt Both current debts and national economic policies in the developing countries

must be restructured to begin the ~trengthening of those countries economies Developedcountries can help the economic recovery of developing nations by providing markets for theirexport commodities-

-

17 Oocument Anlpls e DftCriptO

International trade Foreign TradeExports GrowthPrices

Surveys b IdentlfleIOpenmiddotEnded Terms

International dept Financial constraints to trade

Prices as of 1184US agr1cul turaJ trade policy

Paper ~ ~SDFiche $450

c COSATi F1eldGraup Cost codes arefjp3 for Paper02-B OS-ClL Avellebility StIItemllln and AOl for Fiche

National Technical Information Service It hcurfty Cle (TIll Report) 21 No of Peles5285 Port Royal Road Springfield VA 22161

Unclassifieda Securfty Cln (Thl Pap) 22 Price

(Se ANS1-Z3911) Unclassified See box 17OPTIONAl FO11M 272 lt4-77)(Formerly NTI5-35)Depertment of Commen_

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- - -

FINANCIAL CONSTRAINTS TO TRADE AND GROWTH THE WORLD DEBT CRISIS AND ITS AFTERMATH by Mathew D Shane and David Stallings International Economics Division Economic Research Service US Department of Agriculture Foreign Agricultural Economic Report No 211

ABSTRACT

The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next s years Resolutions of these debt problems could increase potential US agricultural exports by as much as 20 Iercent The large debts of the developing countries became serious problems with the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~ng of those countries economies Developed countries can help the economic recovery of devel0ping nations by providing markets for their export commodities

Keywords InternJtional debt trade growth financial constraints to trade developing countries US agricultural exports US agricultural trade policy

Acknowledgment The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work We also acknowledge the valuable comments and suggestions of Vernon Roningen Cecil Davison Tom Vollrath of the Division and Robert Thompson Terry Roe and Phil Abbott in the profession The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted The authors retain responsibility for any remaining errors We also want to thank Jamesena George who typed the manuscript

PREFACE

Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981 In preparation for these deliberations the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s This report is part of a series of background papers for 1985 farm bill discussions Other papers in the series explore the characteristics of 14 commodities the farm industries which produce them and the farm program under which they are produced These papers available from EMS Information 1470-S USDA Washington DC 20250 (202447-7255) focus on Honey (AIB-465) Wool and Mohair (AIB-466) Wheat (AIB-467) Tobacco (AIB-468) Peanuts (AIB-469) Rice (AIB-470) Corn (AIB-471) Soybeans (AIB-472) Oats (AIB-473) Dairy (AIB-474) Sorghum (AIB-475) Cotton (AIB-476) Barley (AIB-477) and Sugar (AIB-478) Other background papers available are Federal Credit Programs for Agriculture (AIB-483) History of Agricultural Price-Support and Adjustment Programs 1933-84 (AIB-485) Foreign Exchange Constraints to Trade and Development (FAER-209) Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526) and Impacts of Policy on US Agricultural Trade (ERS Staff Report No AGES840802)

WASHINGTON DC 20250 DECEMBER 1984

i ) i

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

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I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

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developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

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Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 3: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

50272-1011 REPORT DOCUMENTATION 11 REPORT NO

PAGE FAER-2ll 1~ 3 Recipients ACCflslon No bullbull TItle end Subtitle ~~g 5 r 59 er2famp$

bull Financial Constraints to Trade and Growth TIle World 5 Report DateDept Crisis and its Aftermath bull DecpmhpT 1994

s7 Author(s) Mathew D Shane and David Stallings L Performi Orpnlzatlon Rept No9 Performl Orpnlzetlon Nemo end Adds FAER-11

International Economics Division 10 rveetlTesklWorlc Unit No

Ecanomic Research ServiceUS Department of Agriculture

u Contreet(C) or Grent(G) NowashingtonI5C-20250~ (C)

1~ Sponsorinl Orpnlutlon Neme Ind Add

(G)

13 Type of Report amp Period Covered

14 15 Supplementery Not

16 Abstract (Umit 200 _rdl)

The debt problems of developing coootries will severely limit their abUity to purchase goods inthe world market for at least the nerc 5 years Resolutions of these debt problems couldincrease potential US agrlccttural exports by as much as 20 percent The large debts of thedeveloping C01mtries became serious problems with the shifts to tighter mOnetary policies by the-developed countries in the late seventies Clpound1thonsequehl stuwirrgvt1nfla-ttonatiu-creCiitfiowsEighteen countries which are major markets for US agriculture hold more than 60 percent ofthe problem debt Both current debts and national economic policies in the developing countries

must be restructured to begin the ~trengthening of those countries economies Developedcountries can help the economic recovery of developing nations by providing markets for theirexport commodities-

-

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International trade Foreign TradeExports GrowthPrices

Surveys b IdentlfleIOpenmiddotEnded Terms

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FINANCIAL CONSTRAINTS TO TRADE AND GROWTH THE WORLD DEBT CRISIS AND ITS AFTERMATH by Mathew D Shane and David Stallings International Economics Division Economic Research Service US Department of Agriculture Foreign Agricultural Economic Report No 211

ABSTRACT

The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next s years Resolutions of these debt problems could increase potential US agricultural exports by as much as 20 Iercent The large debts of the developing countries became serious problems with the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~ng of those countries economies Developed countries can help the economic recovery of devel0ping nations by providing markets for their export commodities

Keywords InternJtional debt trade growth financial constraints to trade developing countries US agricultural exports US agricultural trade policy

Acknowledgment The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work We also acknowledge the valuable comments and suggestions of Vernon Roningen Cecil Davison Tom Vollrath of the Division and Robert Thompson Terry Roe and Phil Abbott in the profession The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted The authors retain responsibility for any remaining errors We also want to thank Jamesena George who typed the manuscript

PREFACE

Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981 In preparation for these deliberations the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s This report is part of a series of background papers for 1985 farm bill discussions Other papers in the series explore the characteristics of 14 commodities the farm industries which produce them and the farm program under which they are produced These papers available from EMS Information 1470-S USDA Washington DC 20250 (202447-7255) focus on Honey (AIB-465) Wool and Mohair (AIB-466) Wheat (AIB-467) Tobacco (AIB-468) Peanuts (AIB-469) Rice (AIB-470) Corn (AIB-471) Soybeans (AIB-472) Oats (AIB-473) Dairy (AIB-474) Sorghum (AIB-475) Cotton (AIB-476) Barley (AIB-477) and Sugar (AIB-478) Other background papers available are Federal Credit Programs for Agriculture (AIB-483) History of Agricultural Price-Support and Adjustment Programs 1933-84 (AIB-485) Foreign Exchange Constraints to Trade and Development (FAER-209) Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526) and Impacts of Policy on US Agricultural Trade (ERS Staff Report No AGES840802)

WASHINGTON DC 20250 DECEMBER 1984

i ) i

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

ii

I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

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4 6

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___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

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27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

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FINANCIAL CONSTRAINTS TO TRADE AND GROWTH THE WORLD DEBT CRISIS AND ITS AFTERMATH by Mathew D Shane and David Stallings International Economics Division Economic Research Service US Department of Agriculture Foreign Agricultural Economic Report No 211

ABSTRACT

The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next s years Resolutions of these debt problems could increase potential US agricultural exports by as much as 20 Iercent The large debts of the developing countries became serious problems with the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~ng of those countries economies Developed countries can help the economic recovery of devel0ping nations by providing markets for their export commodities

Keywords InternJtional debt trade growth financial constraints to trade developing countries US agricultural exports US agricultural trade policy

Acknowledgment The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work We also acknowledge the valuable comments and suggestions of Vernon Roningen Cecil Davison Tom Vollrath of the Division and Robert Thompson Terry Roe and Phil Abbott in the profession The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted The authors retain responsibility for any remaining errors We also want to thank Jamesena George who typed the manuscript

PREFACE

Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981 In preparation for these deliberations the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s This report is part of a series of background papers for 1985 farm bill discussions Other papers in the series explore the characteristics of 14 commodities the farm industries which produce them and the farm program under which they are produced These papers available from EMS Information 1470-S USDA Washington DC 20250 (202447-7255) focus on Honey (AIB-465) Wool and Mohair (AIB-466) Wheat (AIB-467) Tobacco (AIB-468) Peanuts (AIB-469) Rice (AIB-470) Corn (AIB-471) Soybeans (AIB-472) Oats (AIB-473) Dairy (AIB-474) Sorghum (AIB-475) Cotton (AIB-476) Barley (AIB-477) and Sugar (AIB-478) Other background papers available are Federal Credit Programs for Agriculture (AIB-483) History of Agricultural Price-Support and Adjustment Programs 1933-84 (AIB-485) Foreign Exchange Constraints to Trade and Development (FAER-209) Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526) and Impacts of Policy on US Agricultural Trade (ERS Staff Report No AGES840802)

WASHINGTON DC 20250 DECEMBER 1984

i ) i

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

ii

I j

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LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

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Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

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10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 5: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

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FINANCIAL CONSTRAINTS TO TRADE AND GROWTH THE WORLD DEBT CRISIS AND ITS AFTERMATH by Mathew D Shane and David Stallings International Economics Division Economic Research Service US Department of Agriculture Foreign Agricultural Economic Report No 211

ABSTRACT

The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next s years Resolutions of these debt problems could increase potential US agricultural exports by as much as 20 Iercent The large debts of the developing countries became serious problems with the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~ng of those countries economies Developed countries can help the economic recovery of devel0ping nations by providing markets for their export commodities

Keywords InternJtional debt trade growth financial constraints to trade developing countries US agricultural exports US agricultural trade policy

Acknowledgment The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work We also acknowledge the valuable comments and suggestions of Vernon Roningen Cecil Davison Tom Vollrath of the Division and Robert Thompson Terry Roe and Phil Abbott in the profession The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted The authors retain responsibility for any remaining errors We also want to thank Jamesena George who typed the manuscript

PREFACE

Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981 In preparation for these deliberations the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s This report is part of a series of background papers for 1985 farm bill discussions Other papers in the series explore the characteristics of 14 commodities the farm industries which produce them and the farm program under which they are produced These papers available from EMS Information 1470-S USDA Washington DC 20250 (202447-7255) focus on Honey (AIB-465) Wool and Mohair (AIB-466) Wheat (AIB-467) Tobacco (AIB-468) Peanuts (AIB-469) Rice (AIB-470) Corn (AIB-471) Soybeans (AIB-472) Oats (AIB-473) Dairy (AIB-474) Sorghum (AIB-475) Cotton (AIB-476) Barley (AIB-477) and Sugar (AIB-478) Other background papers available are Federal Credit Programs for Agriculture (AIB-483) History of Agricultural Price-Support and Adjustment Programs 1933-84 (AIB-485) Foreign Exchange Constraints to Trade and Development (FAER-209) Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526) and Impacts of Policy on US Agricultural Trade (ERS Staff Report No AGES840802)

WASHINGTON DC 20250 DECEMBER 1984

i ) i

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

ii

I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 6: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

CONTENTS

LIST OF FIGURES iii

SUMMARY v

INTRODUCTION 1

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT 2

Monetary Policy in the Developed Countries 3 Interest Rates 3 The Foreign Exchange Value of the Dollar 5 Current Account Deficits 7 Government Financing 10 Inflation 10 Terms-of-Trade 10

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS 12

TRENDS IN DEBT ACCUMULATION COMPOSITION AND RATIOS 16

WORLD DEBT IN THE FUTURE 19

THE EFFECTS OF WORLD DEBT ON US AGRICULTURAL EXPORT PROSPECTS 20

THE US RESPONSE HOW TO MINIMIZE OUR COSTS 27

Dampening of Growth and Trade 27 The Need for Adjustment 27 Financial Restructuring 28 Restructuring and Protectionism 28 FinanCing and Adjustment 28 Financing and US Exports 28 Financing and Repayment 28

BIBLIOGRAPHY 29

ii

I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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I j

middot - - lt~

LIST OF FIGURES

1 2 3 4

Changes in Money Supply (MI) Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Interest Rates Adjusted by Change in Export Prices Period Averages

4 4 4

5 6 7 8

All Developing Countries Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Real Exchange Rates Weighted by Agricultural Trade Nominal Exchange Rates Weighted by Agricultural Trade Debt-Affected

4 5 5 6

9 Countries Real Exchange Rates Weighted by Agricultural Trade

6 6

TRADE IN GOODS AND SERVICES 10 All Developing Countries 811 Low-Income Africa 812 Low-Income Asia 813 Middle- Income Oil Exporters 814 Africa South of the Sahara 815 Latin America and Caribbean 8

REAL TRADE IN GOODS AND SERVICES 16 All Developing Countries 917 Low-middotlncome Africa 9 18 Middle-Income Oil Importers 919 East Asia and the Pacific 920 Latin America and Caribbean 9 21 Debt- Affected Countries 9

22 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 23 Deficit Financing as a Ratio of Government Revenue to Expenditure 11 24 Government Deficits as a Percent of Gross Domestic Product 11 25 Consumer Price Indices Weighted by Gross National Product 11 26 Consumer Price Indices Weighted by Gross National Product 11 27 Barter 1erms of Trade 11 28 Barter Terms of Trade 1329 Income Terms of Trade 1330 Income Terms of Trade 1331 Debt Rescheduling and Negotiations for All Developing Countries 1332 Debt ReschedUling and Negotiations for Major Agricultural Markets 1333 Debt Structure Country Categories 1982 1334 Regional Debt Distribution for All Developing Countries 1974 1979 1983 1535 Percent Distribution of Debt by Major Geographic Areas 1982 1736 Annual Growth Rate of Debt for All Developing Countries 1737 Annual Growth Rate of Debt 1738 Net Adjustment by Country Categories 1982

1739 Debts Ratios Country Categories 1982 1740 Projected Gross National Product Growth Rates All Developing Countries 1741 Change in Gross National Product 1982-87 2142 Per Capita Income Projections 2143 Projected Imports 2144 Dtmiddotbt-to-Export Ratio All Developing Countries 2145 Ratio of Agricultural Imports to Total Imports 2146 US Agricultural Exports as a Ratio of All Agricultural Imports 21

iii

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 8: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1979-81 MARKET SHARE

47 All Developing Countries and Major Borrowers 23 48 Major Agricultural Markets and Middle-Incomemiddot Oil Importers 23 49 Middle-Income Oil Exporters and East Asia and the Pacific 23 50 Debt-Affected Countries 23 51 Latin America and Caribbean and Europe and Mediterranean 23

US AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS 1982 MARKET SHARE

52 All Developing Countries and Major Borrowers 24 53 Major Agricultural Markets and East Asia and the Pacific 24 54 Latin America and Caribbean 24

55 US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case 25 56 US Agricultural Exports as a Percent of Baseline and Full Adjustment Case 25

US AGRICULTURAL EXPORTS 1979-81 AND 1982 BASE 57 All Dev-eloping Countries 26 58 Middle-Income Oil Exports 26 59 Major Borrowers 26 60 Debt-Affected Countries 26 61 Major Agricultural Markets 27 62 East Asia and the Pacific 27 63 Latin America and Caribbean 27

iv

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 9: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

SUMMARY

The debt problems of devel(lping countries will limit their ability to purchase goods in the world market for at least the next 5 years Resolution of these debt problems could increase potential US agricultural exports by as much as 20 percent The debt problems of the developing countries began with the shift to tight monetary policies by the developed countries in the late seventies Eighteen countries which are major markets for US agriculture hold more than 60 percent of the problem debt Both current debts and national economic policies in the developing countries must be restmctured to begin the strengthening of those countries economies Developed countries can help the economic recovery of developing nations by providL1g markets for their export commodities

Middle-income countries such as Mexico Korea and Nigeria provided the fastest growing markets for US agricultural exports from 1974-80 These countries purchased about one-third of US agricultural exports and this share grew during that period The 1981-83 global recession halted that growth countries with serious debt-repayment problems cut their purchases of US agricultural exports most severely

Specific findings of this study include the following

o International banks responded to the first oil crisis in 1973-74 by making large sums of money available to developing countries at low interest rates The banks loaned substantial amounts as their deposits from oil-exporting countries grew Middle-income developing countries took advantage of the low-interest loans to begin major import and development programs

o The middle-income countries tried to sustain their import and development programs after the 1979-80 oil crisis by borrowing even more heavily from the international banks Conditions which made repayment more difficult in subsequent years included rising interest rates declining terms of trade devalued exchange rates and lost export earnings

o In the 25 years between 1956 and 1980 22 countries negotiated reschedulings of $215 billion in debts with their creditors In only 3 years between 1981 and 1983 25 countries negotiated reschedulings of $55 billion in debts

o Countries which are middle-income oil importers and major markets for US agricultural exports and the countries in Latin America East Asia and the Pacific and nonoil-producing North Africa are most severely affected by debt problems

o National debt among the developing countries grew by more than 20 percent annually after the 1973-74 oil crisis exceeding growth rates for both gross national product and exports The growth rate of debt will probably fall significantly in the current international environment

o Developed countries must expect reduced exports to developing countries until the debt repayment problems are resolved Not only will export growth rate trends probably decline exports to the most severely affected countries may actually decline in absolute terms

o The developing countries will likely turn to the developed countries for financial assistance in order to overcome the current problems

v

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 10: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

Financial Constraints to Trade and Growth

The World Debt Crisis and Its Aftermath

Mathew D Shane DaVId Stallings

INTRODUCTION

From 1975-80 developing countries provided the fastest grOwing market for US agricultural exports The share of total US agricultural commercial sales to the Third World grew from 30 to almost 35 percent dUIing this period These sales were especially concentrated in the middle-income countries The world recession of 1981-83 abruptly halted their market expansion Those nations with the most serious debt repayment problems severely curtailed purchases of US agricultural products For the first time since the thirties the nature and scope of international debt seriously constrained the international trade and payments systems

Public awareness of the potential impact of international debt began with Polands repayment problems in 1981 Shortly thereafter a series of debt-servicing problems arose in major debtor countries particularly Mexico Brazil and Argentina However the rapid and expedient handling of these problems by the International Monetary Fund (IMF) the United States other major Western governments and major financial institutions has prevented the initial problem from leading to a greater international financial crisis

A condition for IMP assistance in averting outright defaults among other things is a sharp curtailment of imports As a result

The authors are agricultural economists in the International Bconomics Division of the Economic Research Service US Departmentof Agriculture

trade in all farm products in 1982 fell both in absolute dollar amount and as a percentage of total imports of the developing countries Furthermore the US market share of all agricultural exports to the Third World fell from over 28 percent to 255 percent

This report examines what these debt problems mean for world trade and economic growth in the intermediate and longer term and derives the implications of this situation for US agricultural export prospects 1 Although the risks to the international financial system have been assessed little analysis has been done on how actions taken to redress the immediate and serious debt repayment problem have affected and will affect international economic growth and trade (1 sect 1 ~ 11)

This analysis focuses on the debt situation in 93 developing countries which are grouped into the follOwing regions Africa south of the Sahara East Asia and the Pacific Latin America and the Caribbean North Africa and the Middle East South Asia and Europe and the Mediterranean We also included lOW-income Africa lOW-income Asia middle-income oil importers middle-income oil exporters and major borrowers These are categories used by the World Bank in its World Debt Tables (28) and World Development-Report CW We have defined two additional groupings debt-affected countries and

1 Much of the data underlying the analysis in this report is presented in (~ Underlined numbers in parentheses refer to references cited in the Bibliography of thls report

1

1

I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

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I

developing countries which are major agricultural markets for the United States Only the regional categories are mutuallyexclusive

We did not include all countries classified in the World Bank categories in this study We excluded several minor countries because of seriously limited available data 2 However because these countries make up a small percentage of the total of gross national product (GNP) and trade in goods ~ld services overall results and conclusions are unaffected3 A far more serious omission is that of Poland which is not included in the World Debt Tables (28) because it is not a member of the World Bank and IMF Poland is not included in our study because we were unable to obtain comparable data4

International trade will be severely affected by the debt problems of the developing countries for at least the next 5 years International trade will not significantly increase for the United States or other nations unless both developed and developing countries find fundamental solutions and take aggressive action to overcome this situation The solution lies in dramatic internal restructuring of the economies of debtor countries and in the restructuring of current debt into more manageable long-term obligations

BACKGROUND FACTORS UNDERLYING THE GROWTH IN WORLD DEBT

The oil shock of 1973-74 threw many countries into a balance-of-payments disequilibrium The fourfold increase in oil prices by members

of the Organization of Petroleum ExportingIIii Countries (OPEC) dramatically altered

payment flows and the international financial environment initiating the process by which significant debt was accumulated

2 We exchlded Burundi Cape Verde and Comoros in low-income Africa and Maldives and Vanuatu in low-income Asia

3 Except for low-inoome Africa the omissions amount to less than 1 percent of the groups GNP

4 Estimates from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (DECO) sources put Polands total debt in 1982 at about $20 billion (pound m

The developed countries employed easy monetary policies both before and after the first oil shock as a result economic growth in developing countries continued The change in trade flows and expansionary monetary policietl in the OECD nations generated liquidity previously unavailable to the international financial system5 International bankers recycled this liquidity in the form of petrodollar deposits by beginning a massive lending program to middle-income oil importing countries These bankers anticipated high returns on investments

The world economy weathered the first oil crisis without much difficulty Initial debt levels were low enough that accumulation did not overly burden the world payments system Furthermore the infusion of large amounts of international capital into the world economy generated an international expansion led by export growth For al1 non-OPEC developing countries the total dollar value of exports was 25 times greater in 1980 than in 1975 Furthermore real growth in gross domestic product (GDP) for al1 developing countries averaged 5 percent a year for this period 01)

If the oil price rise of 1973-74 set the stage for the large debt buildup the second oil shock of 1979-80 ~et the stage for the world recession of 1980-83 The second oil price increase was more significant than the first one based on the far different policy responses in the developed world The approach to the 1973-74 increase had been to find ways to recirculate petrodol1ars and to accommodate the jump in energy costs The response to the 1979-80 increase however was for the major industrial countries to simultaneously undertake contractionary monetary policies The world inflation that was initiated by the 1973-74 oil increase but by no means limited to it proved unacceptable to the West and Western countries felt that only traditional

5 The shift to a floating exchange rate system for major currencies also contributed to the rise in world liquidity by reducing the overall demand for foreign exchange reserves

2

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 12: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

measures could deal with the inflation 6 The sudden lowering of monetary growth sharply slowed the world economy raised real interest rates and made the debt a burden The impact of the responses to the second oil shock induced the current repayment problems

Monetary Policy in the Developed Countries

The growth in money following the oil price increase in 1979-80 differed sharply from that in 1973-74 (fig 1) This represented an abrupt policy reversal in the United States and other major countries of the industrial world

For developed countries as a whole money (Ml) increased at average annual rates of over 10 percent from 1971 to 1973 providing considerable liquidity for the raw-material price increases of 1972-74 This rise was followed by a slowdown in the growth of money in 19747 From 1976 through 1979 annual increases in money again averaged 10 percent However the oil price increases in 1979 were followed by 3 years of declining monetary growth Furthermore the rates of increase in money from 1979 through 1982 were all below that observed in 1974

The growth rates in money during the seventies were high by postwar standards giving the developing world two important benefits increased demand for all goods and services and low real rates of interest Rising inflation in the industrial West as a consequence of the rapid money growth gave a competitive edge to products in the developing world especially labor-intensive semifinished and finished manufactured goods Second high growth rates in money depressed real interest rates especially in the United States making repayments easier

6 1973-a1 ~as a period of general price increases for raw materials not only fOT oil Although other resources did not in general increase in value as drastically as did oil their increases were nonetheless dramatic Examples for the period 1972-80 include a quadrupling of the dollar prices of bauxite and rubber a tripling of prices for aluminum and coffee and a doubling of prices for nickel copper and mangatlose M)

7 This slowdown produced a temporary rise in real interest rates in 1975

The decline iIi monetary growth rates from 1979 through 1981 produced the severest of the postwar recessions For industrial countries real GNP growth fell well below 2 percent for 1980 and 1981 Real output stagnated in the industrial countries in 1982 compared with relatively robust growth rates exceeding 35 percent per year for mos~ of the latter half of the seventies The slow rise in income effectively curtailed demand for products of the previously burgeoning export sectors of the developing world

Interest Rates

Market llterest rates have grown in importance in loan repayments over the past 5 years Loans extended at variable interest rates based on the US prime rate or the London Interbank Offered Rate (LIBOR) have become more and more popular as private creditors take an ever-larger share of total lending to developing countries In particular the rise in interest rates on dollarshydenominated loans has contributed to the difficulties of countries like Mexico and Brazil in repaying their debts

Real interest rates incorporating price changes provide a measure of the current opportunity cost of repaying debts The US real interest rate is derived by subtracting current inflation from nominal interest rates The appropriate measure for debtor countries is the interest rates adjusted for changes in an index of their export prices If export prices rise faster than contracted interest rates the real rate is negative (~

The effect of the first oil price increase is most evident in the 1973-74 valueJ when the rapid increase in export prices in all categories clearly exceeded nominal market interest rates (fig 2) These increases were sharpest producing the lowest of the real interest rates in the oil-exporting countries (fig 3) and in North Africa The major agricultural market countries for the United States faced highly negative interest rates while low-income African countries faced the least favorable situation (fig 3) Negative interest rates strongly encouraged the desire to both borrow and lend because real rates of return were somewhat higher in creditor currencies

3

Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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Figure i

Changes in Money Supply (Mi) Annual percent change 16

14

12

10

8

6

Figure 2

Interest Rates Adjusted by Changein Fxport Pr ices Percent

-20

-40

eo B1 B2

Figure 3

Interest Rates Adjusted by Changein Export Prices Percent

40r---------__________________________________~

20

o

-20

-40 Middle-inca 011 exporter

-60

-BO

-100

-120 1972 73 7574 76 77 78 79 80 B1 82

Figure ~

Interest Rates Adjusted by Change in Export Prices Period Averages All Developing Countries Percent 20~--------_____________________________________

10

-10

-20

-30

-40 L~~~~~__________~ 1973-74 1975-80 19B1-B3

Figure 5

Real Exchange Rates W~ighted byAgricultural Trade Annual percent change

16

l12

8

4

o

-4

-B

Eoot AlIi Ind the Plci fic-12

Figure 6

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 30~--------____________________________________~

20

I I

I I

10 I I

o

-10 - LOW-income Africa

-20

79 BO B281 B3

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

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17 World EconOmic Outlook 1984 Washington DC 1984

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29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 14: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

The effects of monetary policy changes in the industrial countries during the seventies can be clearly seen in figures 2-3 Declines in the monetary growth rate in 1974 and in 1977 produced positive real interest rates in 1975 and 1978 the only 2 years between 1973 and 1979 when this happened

The sharpest increases in real interest rates in 1978 occurred in Latin America and the countries in the debt-affected group (fig 2) Repayment problems proved most severe in these countries Real interest rate changes during the seventies showed the greatest variability in low-income Africa

Conparing the outcomes for 1973-74 and 1979-80 yields quite different results (fig 4) a reflection of the change in policy response by the developed world The second round of oil price rises led to overtly negative real interest rates in 1979-80 However the interest rates in the latter period in absolute terms did not approach those in 1973-74 This was particularly true for the groupings of All Countries Major Borrowers Major Markets and East Asia and the Pacific From 1981 into 1983 real interest rates faced by all developing countries not only turned positive but remained well abolle any rates in recent history

From 1975 to 1980 real interest rates averaged a negative 3 percent From 1981 to 1983 the average jumped over 20 points to plus 17 percent

Real interest rates after the second oil shock were not negative ar they had been following the 1973-74 oil price increase Continued and rapid debt accumulation indicates that the major borrowers and oil importers probably anticipated negative interest rates Loans initiated in the 1979-81 period especially indicated by the i1crease in short-term liabilities in 1980 resulted in repayment schedules which borrowers could not meet The recession in the West and the resulting fall in export prices forced countries to make unanticipated and increasing real payments as interest rates particularly on dollar loans edged upward

The Foreign Exchange Value of the Dollar

The real depreciation of the US dollar that occurred against the aggregate of currencies

of the 93 countries from 1972 through 1980 has completely reversed in the past 3 years (fig S) The US dollar in real terms is at its highest level against the currencie of the developing world since the collapse of the Bretton Woods exchange rate system in 1973

The Federal Reserves monetary restraint policy and the rapid rise in the US budget deficit produced historically high real interest rates in the United States This led to significant real capital L1flows to the United States during this period in sharp coutrast to the outflows over much of the seventies Some of that investment unquestionably came at the expense of the developing world

The US dollar generally appreciated against currencies in the developing world during the seventies TIle dollar experienced sustained weakness against the currencies of the middle-income oil-exporting countries in 1972-75 low-income African countries in 1972-80 and East Asian countries in 1976-80 (figs 5-7) After 1980 however the foreign exchange value of the dollar increased exponentially against currencies of the developing countries the only exceptions being the nations of Asia (both South and East Asia) and North Africa The dollars nominal appreciation since 1980 has been most rapid against the currencies of Latin America the debt-affected countries and Europe and the Mediterranean (fig 8) This can be seen clearly by looking at the pattern of annual percent changes in real exchange rates (fig 9)

Developed countries use exchange rates either intentionally or unintentionaJ1y as policy instruments (11) Very few of the developing countries currencies float freely in foreign exchange markets as is the case with the currencies of industrial countries Instead the governments of most developing I~ountries fix the value of domestic currency to one or more major currencies (such as standard drawing rights from IMF) Exchange rate movements generally are abrupt and disrupt both the external and domestic economy Most adjustments occur at infrequent intervals and as the result of severe external pressure For a currency to depreciate or for a government to undertake such a strong measure the sum of export earnings plus new finanCing must be below the sum of imports plus debt repayments for a long period Foreign exchange reserves may have also

5

----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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----------------------

Figure 7

Real Exchange Rates Weighted byAgricultural Trade Annual percent change 25-------------------------------____________

1

20

shy15 I

10 5 I

1 o

-5

1973 74 75 76 77 78 79 80 81 82 83

Figure 8

Nominal Exchange Rates Weighted by AgriculturalTrade Debt-Affected Countries Index (19BOuiOO) 500-------------------________________________

400

300

200

100

1972 73 74 75 76 77 78 79 ao 81 82 83

Figure 9

Real Exchange Rates Weighted byAgricultural Trade

All developing 1975-80countries

~1981-83

Low-income Africa

Debt-affected clluntries

North Africa and Middle East

-10 -5 5o 10 15 20

Average annual percent changeshy

6

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

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30

Page 16: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

fallen below desired levels 8 In 1982 The most severely affected region appears tofinancing flows began to fall Devaluation be low-income Africa (fig 11) Both importsbecame necessary to encourage exports and exports measured in current dollarsdeclined over 1981 and 1982 Low-incomeDebt-affected countries and Latin America Asia on the other hand appears to haveboth had real currency depreciations of over adjusted quickly to its external constraints20 percent in 1982 Such a significant (fig 12) The drop in exports in 1981 wasadjustment implies a serious constraint tC accompanied by a stagnation in imports and apurchasing imports or repaying debts or both subsequent reduction in the deficit in 1982Domestic adjustments to such an exchange The oil-exporting countries also faced traderate change would have to be substantial On deficits despite the 1978-79 petroleum pricethe other hand tht depreciations would also increases (fig 13)9 Sub-Saharan Africa facedindicate the degree to which the currencies further deterioration in its external accountswere allowed to remain overvalued for a long as exports fell faster than imports in 1981 andperiod of time Such an overvaluation 1982 (fig 14) Latin America also hadencourages imports of goods and sernces declines in both exports and imports in 1982which generate development but succeeded in narrowing its overall

payments gap (fig 15)Comparing exchange rate changes between the1975-80 period and the 1981-83 period also Figures 16-21 are measures of real tradeillustrates the significantly different policy volume based on import and export values inresponses to the first and second oil shocks dollars Changes in the real trade deficitsWhereas the dollar declined in rilative value indicate whether cutbacks or expansions haveagainst all developing countries currencies occurred in exports or imports or both Realwith the exception of North Africa and the trade deficits give some indication of theMiddle East it rose significantly on average in effects of the world recession on unit tradethe 1981-83 period prices when compared with the dollar trade

flowsGenerally then the debtor nations werecaught in a difficult situation They had taken The export volume for all 93 countries (fig 16)US dollar-denominated loans that they increased faster in 1982 from 1981 than in anythought would continue to depreciate in real other year-to-year period during the periodterms Instead they were faced with loan studied For the aggregate of all developingprincipals increasing in real value along with countries foreign exchange constraints led torising real interest payments implicit or exphcit policies that forced exportpromotion Import quantities also increased

Current Account Deficits but more slowly than at any time in the1974-82 period Efforts to reduce external

A major factor associated with debt disturbances therefore affected both exportsaccumulation by developing countries during and importsthe seventies was an increase in tradedeficits External financing allowed Import volume has been declining 111governments to pursue policies which allowed low-income AfriclLsince 1977 (fig 17)imports to exceed exports In 1981 and 1982 indicating the P ability of these countriesthe percentage increase in exports for the 93 to produce income from trade Oil importersdeveloping countries was much lower than in (fig 18) have also curtailed imports since 1979the preceding 5 years (fig 1O~ It is likely the in forced efforts to find and use petoleumshydecline in the export growth rate in 1981 led saving energy sources Countries known forto reduced financing in 1982 which explains labor-intensive production such as in Eastthe 1982 drop in imports Countries restricted Asia and the Pacific (fig 19) have seen aimports as a response to curtailed capital sharp rise in exports Export middotrolume has alsoinflows

9 The only OPEC countries included are8 In fact foreign exchange reserves in Indonesia Nigeria Venezuela and AlgeriaMexico dropped to zero in 1982 effectively Other OPEC countries did maintairl currenthalting all foreign trade account surpluses over the period

7

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 17: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

------------

---------

------------

-----

---

-----------

--

Trade in Goods and Services Figure 10

All Developing Countries Billions of current dollars 600r---------____________________________________-

500

400

300 Exports

~OO ~-

---

100

o

------------------shy-100 ~--------~ -200------~____~____~____~____~____~________~~

1974 75 76 77 7B 79 80 B1 B2

Figure 11

Low-Income Africa

Billions of current dollars 16r---------__________________________________________bull

12

Illports

B ----shy ---------- _-----------

Exports 4

o

-4

-8~~----____~____~____~____~____~____~____~

1974 75 76 77 78 79 BO B1 82

Figure 12

Low-Income Asia

Billions of current dollars 40r-------______________________________________-

30

20 ~ -_ ---- _

~

10 ~ _------- Exports

o

-10

-20------~____~____~____~____~____~____~__~~ 1974 75 76 77 7B 79 BO 81 B2

8

Figure 13

Middle-Income Oil Exporters Billions of current dollars 200r-------__________________________________________

160

120

~ ~

ExportBO _------J 40

o ----~

1974 75 76 77 7B 79 BO 81 B2

Figure 14

Africa South of the Sahara Billions of current dollars 60r-------_________________________________________-

50

40

---shy30 ----- Exports

20

10

o ~

- ~--~~ -10 - middotmiddott export bull

shy-20~1-9middot7-4----7~5----~76-----7~7----7~B-----7~9----8~0----~8~1----B~2~

Figure 15

Latin America and Caribbean Billions of current dollars 1BOr---------_____________________________=-____- 150 IlIIports

120 -------shy

90 Exports

60 ----- ----

30

o

-30

-60~~--~----~--~--__~__~_____L____L___~_ 1974 75 76 77 7B 79 80 B2

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 18: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

----

--- -----

---

- -

Real Trade in Goods and Services Figure 16

All Developing Countries Billions of 1980 dollars 600-----__________________________________________-

500

400 ~~~

---- --- -~~ 300 --------------- Exports

200

100

o ________~t exports

-100 - _ 1974 75 76 77 78 79 80 81 82

Figure 17

Low-Income Africa Billions of 1980 dollars 20-------__________________________________________--

15

w ----__ --------~---_____________ _

5

o

-5 ~ expo~~e_bullbullbull _bullbullbullbullbullbullbullbullbullbullbull_

_-~-- bullbullbullbullbullbullbull -w -_

82

Figure 18

Middle-Income Oil Importers Billions of 19BO dollars 300-------______________________________________-

250

IlIIPorte ~~~ ~~~

200 ~~~

~--

HiO Export __ ------shy _--------shy

100

50

o

-50 Net exports _ _-__ -100~~--~____~____~____~____~____~____~__~~

194 75 76 77 78 79 80 81 62

Figure 19

East ASia and the Pacific 8illions of 1980 dollars 150-------________________________________________-

120

90

60

30

0

-30

-60 1974 75 76 77 78 79 80 81 82

Figure 20

Latin America and Caribbean Billions of 1980 dollars 160r-----_____________________________~~~~~-

---shy120

~~ ~-

80

------------_ - - Exporte

40

o

- -40 ------~~~~~~~~~---- -BO~~--~----~----~--~____-L____~____L-__~-J

1974 75 76 77 78 79 80 81 82

figure 2i

Debt-Affected Countries Billions of 1980 dollars 240-----__________________________________________--

210 Imports _____

180 ---

150 ---- Exports _____ - --shy120 ------- ---------shy90

60

30

o

-30 bullbullbullbullbullbullbullbullbullbullbullbull~ ~~bullbullbull~~~~r~~bullbull- bullbull-middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot-middotmiddotmiddotmiddot bullbull- bullshy

-60~~--~~--~----~__~~____~____~____L-____~ 1974 75 76 77 78 79 80 81 82

9

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 19: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

risen rapidly since 1918 in Latin America developing countries deficits as a percentage(fig 20) As might be expected thedebt-affected countries (fig 21) have also of the percent of deficits to GDP increased in

made strong efforts at increasing exports 1980 and 1981 but not as much as in 1975 andExport volume increased from 1981 to 1982 in 1976 (fig 24) However two of the countrypercentage terms at 15 times the average groupings Latin America and the middleshy

high over 1974-81 income oil importers had government deficitswhich were a larger proportion of GOP in 1980Government Financing

and 1981 than in 1975 and 1976 In bothsituations the source of funds to finance theSince 1972 the governments of the 93 government deficits had to be money creationdeveloping countries have generally followed apolicy of deficit financing total domestic Inflation

revenues from taxation have been consistentlyless than total expenditures (fig 22) The Domestic inflation accelerated sharply in eachshortfall in government revenues must be country grouping beginning in 1980 with thenotable exception of East Asia and thegenerated by the use of government financetechniques such as borrowing Pacific The fastest increases occurred in theoil importing countries (fig 25) and Latin

Goverrment deficits declined from 1975 to America the two groupings noted in the

1979 in debt-affected countries as a previous section as having the sharpest

proportion of total expenditures (fig 22) increases in the ratios of government deficitHowever the increase from 1979 to 1981 was to GOP Major borrowers and debt-affectedeven greater The slight improvement in 1982 countries also experienced a doubling ofimplies a general cutback in government domestic prices in 1983 with significantservices as availability of external financing increases in the previous 3 years

began to fall off Major market countries forUS agriculture also experienced an equally Figure 26 shows average rates of consumersharp decline in government revenues in 1980 price increases in each of two periods I

and 1981 (fig 22) 1975-80 and 1981-83 For all 93 developingcountries the rate of inflation was 35 timeshigher in 1981-83 than in 1975-80 PriceThe sharpest drop occurred in Sub-Saharan increases averaged four times higher for oilAfrica with revenues falling from almost 81percent to just below 73 percent of importers major borrowers and debt-affectedexpenditures in 1 year (fig 23) Similarly in countries Consumer prices rose three timesLatin America revenues declined from 93 as fast in Latin America where price

percent to 85 percent over 2 years In increases were already the highest of any

contrast the cultltries in East Asia and the country category The countries of East AsiaPacific have had virtually no change in and the Pacific however had lower averagerevenue percentage over the 6 year~ between consumer price increases in 1981-83 than in1975-801976 and 1982 with revenue remaining near 88percent of government expenditures (fig23)10 The variation in the relative Domestic inflation in countries with tightly

government deficit was largest in the controlled foreign exchange regimes acts as acategories of oil exporters major borrowers tax on exports and could lead to contractionsand major markets (figs 22 and 23) The in the export sectors of many developing

governinents of East Asia clearly countries It further tends to slow the

demonstrated more fiscal restraint than those development process by reducing the

of other developing countries incentives for real investment from domesticsources

Government deficits as a proportion of GDPalso reveal an interesting pattern For all Terms-of-Trade

The sustained decline in net barter10 We excluded the Philippines however terms-of-trade from 1978-83 and thebecause data consistent with other coUntriesin the region were unavaUable stagnation in the income terms-oftradereflect pressure on the trading sectors in the1

10

09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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09

- - ~

Figure 22

Deficit Financing as a Ratio of Government Ravenue to Expenditure Ratio 095-------______________________________________-

0B5

OB Middle-income oU exporters

075~L---~--~___L__~__~~__~__~__~___L__~_

1972 73 74 75 76 77 7B 79 BO B1 B2

Figure 23

Deficit Financing as a Ratio of Government Revenue to Expenditure Ratio 095---------____________________________________-

09 Eest Asis end the PecHic

0B5

OB

075 - - Africe south of the Sehere _

~--07 I BO B1 82

Figure 24

Government Deficits as a Percent of Gross Domestic Product Percent -1fi-----------______________________________________--

~ Latin America and caribbsan -2

Middle-inCO~l _--- oU importers I

-25

fI I I

-3 1 V

-35 shy All developing countries

-4

Figure 25

Consumer Price Indices Weighted byGross National Product Annual percent change 140r-------------____________________________

120 l

ii

100 ri

iBO i I

60 ~Middle-income aU impartsrs

~ 40

Debt-effected countries

20 ~ Xmiddotmiddotmiddotmiddotmiddotmiddotmiddotshy~ ~ - All dsvelaping countries

1973 74 75 76 77 7B 79 B1 82BO B3

Figure 26

Consumer Price Indices Weighted byGross National Product

All developing ~~~~~~~~~~ countries ~ bull 1975-eO

Midd Ie-income oil importers ~1gel-e3

Haj or borrowers

Debt-affected countries

East Asia and the Pacific

Latin America and 1Caribbean lI ~~~~~~~----~ o 30 60 90 120

Average annual percentage change

Figure 27

Barter Terms of Trade

Annual percent change30---------______________________________________-

20 Middle-inca all exporters

All developing Icauntrie _ 10 r- tl ~ o

-10

-20

1972 73 74 75 76 77 7B 79 BO B1 B2 82 B3

1

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 21: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

developing world (figs 27 through 30)11 These are partially due to changing external circumstances as well as internal conditions The recession ill the West led to a slowdown in the rate of growth and then decline in exports and export prices Export promotion policies also served to raise the volume of exports as well as contribute to lower unit prices

The largest cumulative declines in barter terms-of-trade into 1982 included low-income Africa Latin America and the debt-affected countries The last group clearly shows the effects of the oU price increases in 1973 with declines in the barter terms-of-trade in 1974 and 1975 but followed by increases in 1976 and 1977 The fall in the barter terms-ofshytrade after the oil shock of 1978-79 shows no such recovery The cumulative rise was greatest in the oil-exporting countries The oil-exporters and the oil-exporting region of North Africa and the Middle East had the only rise in net barter terms-of-trade over the same period 12

Latin American countries showed the largest I-year change in barter terms-of-trade moving from a 15-percent increase in 1977 to a minus 15 percent the following year No other region closely approached such variation

Declining export growth along with falling commodity prices provided the impetus for the slowdown in the gains from trade beginning in 1981 The declines in lOW-income Africa and Sub-Saharan Africa countries indicate the severe negative impact of external shocks on countries whose trading sectors are both very small as a proportion of GNP and inflexible in terms of commodity composition and market share Very sharp declines in the growth rate of income terms-of-trade are also evident in Latin America and the debt-affected countries All categories (except low-income

11 The net barter terms-of-trade is defined as the ratio of import to export prioes while the income terms-of-trade is defined as the product of the net barter terms-of-trade and the quantity of exports (17)

12 The Sub-Saharan African countries show a simUar increase but the weihts are dominated by the oU-exporting countries of that region Nigeria Gabon Cameroon and Congo

Africa) had increases in the income terms-of-trade from the first oil price increase through 1980

In sharp contrast the countries of East Asia and the Pacific had sustained increases in their income terms-of-trade with the exception of 1975 These countries do have large and diverse external se(tors which adjust well to external conditions On average exports account for 41 percent of GNP in that region with several countries having even larger proportions East Asia and the Pacific also had the second lowest variation in changes in barter terms-of-trade (after Europe and the Mediterranean) import and export prices remained more predictable and conducive to stability TIle other countries with fairly positive external sectors as measured by the income terms-of-trade are in Europe and the Mediterranean and middle-income oil importers

DEBT RESCHEDULING SYMPTOMS OF WORLD DEBT PROBLEMS

An assessment of the number and type of debt reschedulings that have occurred in the post-Korean period indicates the symptoms of the problem

Figure 31 surnmarizes debt reschedulings since 1956 In the period through 1965 there were eight negotiations involving four countries and a total of slightly more than $2 billion 13 Between 1966 and 1975 seven countries engaged in 22 negotiations involving $6 billion14 In the next period 1976-80 11 countries rescheduled debt in 23 negotiations with a total of approximately $135 billion at stake15 Finally between 1981 and 1983 2S countries were involved in 38 negotiations

13 The four countries between 1956-65 were Argentina Turkey BrazU and Chile

14 The seven countries between 1966-72 were Cambodia Chile Ghana India Indonesia Pakistan and Peru

15 The 11 countries between 1976-80 were Bolivia Jamaica India Liberia Nicaragua Peru Sierra Leone Sudan Togo Turkey and Zaire

Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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Figure 28 Fig 3iBarter Terms of Trade Debt Rescheduling and Negotiationsfor All Developing Countries

Annual percent change 30 I f

i North Africa and Middle East l r~re~ ~ o

-10 Debt-affected cDuntries

83

Figure 29

Income Terms of Trade

Annual percent change 30r-----------____________________________________-

Middle-income oil exporters

20

Debt-affected countries

10

-I- __ _____ o

-10

1973 74 75 76 77 78 79 80 81 82 83

Figure 30

Income Terms of Trade Annual percent change 50r-----------__________________________________-

40 East ASia and the Pacific

30

20 Latin Aerica and Carribban

10

o

-10

-20 ~--~- ____--__---__---__---__---__---____--__--- 1973 74 75 76 77 78 79 80 81 82 83

Billions of current dollars 60r-------________________~

50 ~ [ommercial debt

40 _OffiCial debt

30

20

10

48 MOU-___ 1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNegotiations

Figure 32

Debt Rescheduling and Negotiationsfor Major Agricultural Markets Billions Df current dollars 30r---------__________________________________-

25 ~ [ommercial debt

20 Dfficial debt

15

10

5 4i4

23 M OL-_~__~

24

1956-1965 1966-1975 1976-1980 1981-1983

H CountriesNeaoUations

Figure 33

Debt Structure Country Categories 1982

All developing countries

Low-income Afrtca

Middle-income Officialoil importers

Middle-income Rprivate oil exporters

~ Short-term Debt-affected

countries

Major agriculturalmarketa

100 200 300 400 500 600 700 800

Billions of dollars

13

- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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- -

of their bank capital at risk with the fivetotaling $55 billion16 This pattern appears to major Latin American borrowers alone (table be continuing and the current prospects of 1) Significant country defaults would put therising interestrates could make things even solvency of the major world banks in questionworse1 With regard to the issue of us Furthermore because of the interrelatednessagricultural exports our major trading of the international bank portfolios a series ofpartners accounted for 50 percent of the debt defaults would place the entire internationalaffected by negotiation in 1981-83 (fig 32) financial and payment systems supporting

international trade at risk The problems The seriousness of the current situation is best faced by Continental Illinois one of the 15illustrated by considering the degree of bank banks is but a small indication of what itcapital at risk with the major indebted would take to keep the system going18 developing countries (~ The 15 largest US banks on average have more than 100 percent

Teble I--Loans by major banks to selected Latin American countries as of end 1982

BankDebtor countr~ Bank Argentina Brazil Mexico Venezuela Chile Total capital

Mi ilion1_____-shy_______ Percent of banks caQital dollars

100 1745 5989182 735 546 182Citibank 1582 4799102 479 521 417 63Bank of America 400 24 118 1546 4221Chase Manhattan 213 569

175 97 1407 3107Morgan Guaranty 244 543 34B

284 2628 2592777 667 424 ( Manufacturers Hanover 475 1697 2499600 2B 14B

Chemical 149 520 216 128 1075 2143

Continental III inois 17B 229 324 251 106 1412 1895

Bankers Trust 132 462 462 First National of

406 501 174 116 1342 1725Chicago 145 825 1684312 45 74Security Pacific 104 291 1266 120183 407 510 204 62

Wells Fargo 1151228 265 1960381 573 512Cocker National 37 1360 108069 439 630 105First Interstate NA NA 1074478 283 292NAMarine Midland NA NA 1024NA 353 411 176Mellon NA 966216 387 341 502 NAIrving Trust NA 800NA 231 281 NA NAFirst National Boston 13 25 492 78751 102 301Interfirst Dallas

NA = Not available equity subordinated notes andI Bank capital includes shareholders

reserves against possible loan losses

Source (~)

18 It took the combined resolve of the16 The 2S countries between 1981-83 were Federal Reserve and Federal DepositArgentina Bolivia BrazU Central African Insurance Corporation as well as a msjorRepublic ChUe Costa Ric~ Cuba Ecuador consortium of bank loans to keep Continental

Guyana Jamaica Liberia Madagascar Illinois operating All of this was caused by anMalawi Mexico Nicaragua Pakistan Poland interbank loan loss of only $1 bUlion aRomania Senegal Sudan Togo Turkey magnitude which is small compared with what

Uganda Yugoslavia and Zaire is at risk with the debtor countries1 Martin Feldstein argues that a rise of two percentage points or more might make current financial arrangements unsustainable (2)

14

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 24: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

Figure 34

Regional Debt Distribution for All Developing Countries 1974

Africa sauth of Sahara

East ASia and the Pacific

Official Latin America and

Caribbean private

North Africa and ~ Short-termthe Middle East

South Asia

2 4 8 10 12 8illions of dollars

Regional Debt Distribution for All Developing COlrtries 1979

Africa south of Sahara

East Asia and the Pacific

official Latin America and

Caribbean private

North Africa and ~ Short-term the Middle East

South Asia

o 10 20 30 40 8illions of dollars

Regional Debt Distribution for All Developing Countries 1983

Africa south of Sahara

East Asia and the Pacific

OfficialLatin America and Caribbean

pr1vate

North Africa and the Middle East ~ Short-term

South Asia

10 20 30 40 50 60 70 8illions of dollars

15

TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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TRENDS IN DEBT ACCUMULATION Our major agricultural market countries aCOMPOSITION AND RATIOS group of 18 countries which purchased morethan $200 million in commercial agriculturalTotal debt for the 93 countries reached about imports from the United States during at least$700 billion in 1982 and about $750 billion in 1 year over the period 1979-81 is the most1983 (fig 33) This should be viewed as a seriously affected group of all accounting forlower bound to the debt of developing almost two-thirds of the total debt of the 93countries because there are several categories countries Those 18 countries also have moreof debt not included in these figures 19 For than 40 percent of their debt in the privateexample the authors estimated short--term and short-term categories Private anddebt from Bank for International Settlements short-term debts are usually on variable(BIS) statistics on bank liabilities to individual interest rate terms Under situations withcountries (f) However many fitlancial high variability in rates as we have observedinstitutions are not BIS members hence the over the period 1973-83 large percentages oftotal is underestimated Nonfinancial short-term debt create the preconditions forinstitutional debt is not included and could be repayment problems

substantial The authors also did not includeInternational Monetary Fund (IMF) loans The regional distribution of debt is alsoHowever thE total figure appears to agree heavily concentrated (fig 35) Latinwith other published estimates (~ ~ 1)20 American countries hold almost half of total

debt Mexico and Brazil are the two largestThe incidence of debt is not uniform debtor nations while Argentina Venezuelathroughout the categories or the countries and Chile are also major debtors There areThe middle-income oil importers account for a however other significant debtor countries invery large percentage of the total debt Asia (the Philippines Korea and Indonesia)outstanding (53 percent)21 They also have a and in Europe (Yugoslavia Poland andrelatively high incidence of private debt (46 Romania) as well as in North Africa and thepercent) However the most seriously Middle Eetst (Egypt Israel and Turkey) Theaffected by short-term and private debt are debtor nations in southern Africa and Souththe countries in Latin America and East Asia Asia are not as significant in volume terms(fig 34) Each of these groupings hasapproximately 25 percent of its total debt in

but their debt problems tend to be associatedwith low-income countries many of whom arethe short-term category facing serious focd crises22

The increase in short-term debt is a relatively19 The total would be $200 billion higher if recent phenomenon Rapid increases inthe short-term and commercial liabilities of short-term and private debt apparently onlySingapore the Bahamas and Liberia were occurred in significant quantities after 1973included These are large-scale offshore although no pre-1978 data on such liabilitiesbanking centers the authors assumed that exist on a country level The increase insignificant amounts of recorded private short-term debt in 1980 is particularlyliabilities of these three countries are the revealing as a preliminary indication of theequivalent of branch deposits of Western problems to follow (fig 36) One can ilterpretcommercial banks and did not include them as the rise in short-term debt as a nationaldebt response to what was perceived as a period of20 There is an effort underway to improve unusually high nominal interest rates the latethe quality of debt statistics A new seventies and early eighties Interest ratesInternational Financial Institute has been set remain high and real interest rates areup by major international commercial banks historically high although nominal interestfor this purpose In addition the BIS and rates have fallen significantly from their 1981OEeD have been working together to produce highs The strategy of short-term borrowinga more accurate series on private and for what became long-term use has not inshort-tertrL debt Initiill estimates are already hindsight turned out very wellavailable for mid-1983

21 Note that the categories are notexclusive and therefore do not necessarilyadd to the total 22 For a discussion of these issues see (26)

16

Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

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17 World EconOmic Outlook 1984 Washington DC 1984

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29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

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Figure 35

Percent Distribution of Debt byMajor Geographic Areas 1982

Africa south of Saharallltin Aaericll and Car1bboen 1841(4951

Europe end Mediterranean 11281

NtIrth Africa lind Middle East (95)

Figura 36

Annual Growth Rate of Debt for All Developing Countries Annual percent change 50r-----------------------____________________

Short-term debt 1 40 1

1

3D

1 I

I 1

20 ~ --Totol debt

1 1

~

10

81 82

Figura 37 Annual Growth Rate of Debt

Annual percent change 27

24

21

18 15 Law-income Africa

12 9

6

3

0 1974 75 76 77 78 79 8180 82

Figura 38

Net Adjustment by Country Categories 1982

All devaloping countries

Low-incoms Africa

011 importera

Africa south of Sohara

Mojor ogrlcultural market

011 exportere

o 40 80 120 160

8i11ions of dollars

Note CatflgorJaa are not IllUtually exclusive

Figure 39

Debt Ratios Country Categories 1982

All deYelr-ping II~IIbullbullbullbullbull countries

Oil exporters

LOW-iocome Africa DIaIbullbullbullbullbullbull bull Debtexports

m AdjuutmentLOW-income Asia ~bullbullbullbulliIIIbullbull Iamp8ampl exports

~Debt serYicel ~exportsJlaj or borrowers

Agricultural IJIIbullbullbullbullbullbull markets

o 50 100 150 200 250 300 350 400

Percent

Figure 40

Projected Gross National Product Growth RatesAll Developing Countries Annual percent change

8r-------------------______________________~

Base case6 r---middotW =-=

4 l 13 adjustment case i shy

2 o I

-2 FUll adjustment case

l -4 I

-6 II

-8 l

i -10~L---------L---______J-________-L________-L~

1983 84 85 86 87

17

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 27: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

If the composition of debt indicates theserious imbalance between the period of The standard analysis of debt relates debt and

investment return and payment commitments debt service to GNP and exports This

the growth in debt over the period since 1973 analysis is similar in many ways to commercialbankers ratios such as debt to assetsindicates a trend which will be difficult andunlikely to continue Between 1973 and 1982 payments to income and so on In addition to

there was almost a fivefold increase in the standard debt ratios we included the ratioof net-adju3tment to GNP and exports A highnominal debt levels Debt on average grewmore than 20 percent per year faster than net adjustment ratio implies very large coststo moving an economy back to paymentseither GNP or exports (fig 37) The aggregate equilibriumnumbers hide the significance ofwhat wasreally taking place With the concentration ofdebt in selected categories the growth in debt The debt ratios present quite a differentby individual countries greatly exceeded the picture than do the debt levels (fig 39) Noteaverage The sharp rise and then fall in debt that although low-income Africa has low debtaccumulation in low-income African countries levels in value terms the debt-to-export

foretold the current food crisis occurring in ratios of this category far outweigh those ofmany of these countries now The rapid other groupings In a relative sense theproblems of low-income Africa are as great orgrowth in debt is a symptom indicative offundamental disequilibrium in the greater than those of the major debtorsinternational trading system over this period categories

With only minor exceptions the 93 countries This is not equally true for low-income Asiawhich currently does not seem to have aincluded in the analysis were running deficiton current accounts The net adjustment serious debt problem based on adjustment andfigure measures how far away each country or debt service to export ratio This group

country grouping is from achieving payments which represents Indian subcontinent

equilibrium In total at the end of 1982 the countries has made significant progress in

93 countries needed more than $150 billion in agricultural and general development

order to make the interest payments on their programs The relatIvely low debt ratios

debt with the proceeds from their net exports imply that debt will not be a constraint on

(fig 38) Our major agricultural trading their ability to continue with this success

partners alone represented 67 percent of thattotal Table 2 presents alternative calculations ofdebt-service ratios Columns (1) and (2) are

Tllble 2--Oebt service ratios calculated as a percent of 1982 Gt~P andexports for country categories Debt serv iceCountry categories ----Debt serviceGNP----GNP XGS ----Debt serviceXGS---shy(I) (Z)

10(3)

YR ZO(4)

YR 30(5)

YR 50(6)

YR 10(7)

YR 20 YR 30 YR 50 YRAll developing countries

(8) (9) (10)

Low-income Africa 142 Z34 143 105 95

Low-income Asia 55 ZO8 116 64 47 91 236 172 157 15033 437Middle-income oil importers

57 91 63 241 176 IZ6152 6 47 34 180 101 75Middle-income oil exporters

Z65 159 118 109 105 55148 ZI2 130 277 206 189 18ZMajor borrowers 96 88 84 186 137Debt-affected countries 157 302 156 117 108 125 IZO142 331 104 300 225 207 200Agricultural trading partners 170 IZ6 115 111 396Africa South of Sahara 164 283 170 126 293 268 25810e 126 111 293 217 199East Asia and the Pacific 155 136 88 88 64 191145 IZ5 168 196 126 105 92Latin America and the Caribbean 150 397

123 123 108 145 107 97 93North Africa and Middle East 156 226 139 91 91 68 368 240 202 179South Asia 177 134 134 120 25657 91 115 194 180 174Europe and Mediterranean 65 65 36157 206 15 106 106

183 103 77 5787 201 140 123 115Source bV column (I) and (2) are taken from table 5 (25)equivalent based on 10- to 50-year terms and divide by 1982 GNP

(3)-(6) take total debt from table 2column (I) (25) and calculate the roortgage payment(7)-(10) Same as above except divide by exports of goods and services

18

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 28: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

current debt service based on existing loan structure Co1un1l1S (3) through (10) represent conversion of the existing debt into mortgag~s cf different maturities

Countries undergoing economic development have a very long delay between investment and returns In addition development requires high outlays on investments for decades before repayment can be made For example the United States was a debtor until World War I well over a century after our deveurollopment as a nation began Note however that the current debt structure of the developing countries more closely approximates a 10-year mortgage than any other term It therefore appears that there is a real discrepancy between the structure of development finance and the returns to development23

WORLD DEBT IN THE FUTURE

We used a simple macrorecursive growth model based on current parameters for each of the 93 countries analyzed in the study to evaluate the current debt problems implications for economic and trade growth of developing countries over the next 5 years U sing the model we projected the basic variables for the next 5 years for each of three alternative scenarios We did not attempt predictions Rather we assessed the logical consequences of the current situation for growth and trade by comparing the three scenarios which vary the degree to which financial constraints restrict the economic growth of the debtor countries Taking the current situation of each of the 93 countries we applied the same rules of constraint to all countries and let the cotmtry-specific parameters determine the outcomes

The three scenarios are defined as follows

1 The base case This is defined as a situation in which there are no financial

23 The appropriate relationship between the debt-repayment term and the development path pursued by a nation needs further analysis Here we merely assume based on cursory observation that there appears tc be a discrepancy between what seems to be a reasonable structure of debt and the likely returns to development in the developing countries in the next de~ade

constraints The countries grow according to their savings-constrained historically determined growth path24 Debt grows as needed by an amount equal to net imports and accrued interest payments

2 The one-third adjustment case This is defined as a situation in which countries must adst towards an equilibrium in their balance of payments Equilibrium is defined as a condition where interest payments on the national debt are equal to net exports plus net financial transfers The adjustment is defined as the difference b3tween interest payments on the external debt and the sum of net exports and net financial transfers The one-third adStment case assumes that the adjustr_ent undertaken each year is one-third of the total adjustment required to achieve equilibrium We assumed that countries can obtain the required financing to achieve this adjustment

3 The full adjustment case This case imposes the condition that all countries must fully adjust every year to their eqUilibrium No new international financing would be available under this full adjustment case Internal savings less allowances for interest payments would determine growth and trade

The base case generates an average annual growth rate of approximately 6 percent for all countries (fig 40) However the different initial country conditions generate very different growth patterns for individual countries and groups of countries For the period 1982-87 as a whole total GNP growth ranges from a low of 192 percent for low-income Africa to a high of 394 percent for debt-affected countries For individual countries the differences are even more pronounced Singapore and Malaysia have GNP growth projections over the 5 years of more than 55 percent while the Sudan has a

negative growth rate even in the base case (fig 41)

24 See OJ for a more complete disc~ssion of the effects of savings oonstraints on economic development Debt g1OWS as needed by an amount equal to net imports and accrued

) shy

19 I tJ middot11 f_l

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 29: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

The outcomes are far more bleak in theone-third adjustment and full adjustment Given the current world environment and the

cases For all countries GNP growth falL fact that net transfers to the developing

from a 58-percent increase in 1982 to a countries were estimated to be a negative $11

9-percent decline in 1983 Total GNP growth billion in 1983 an alternative which requires

from 1983 to 1987 increases only 138 larger and larger debt accumulations on thepart of the developing countries will not bepercent At the same time nondebt-affectedcountries such as Singapore still exhibit reasonably possible (W This point is brought

growth above 50 per~ent for the 5 years out even more significantly in the projecteddebt ratios for the three cases (fig 44) OnlySudan on the other hand shows a negative the full adjustment case reduces these ratiosgrowth of 15 percent in the full adjustmentcase In the base case debt ratios both in terms ofGNP and exports triple over the 5 years InIn per capita terms the differences become the one-third adjustment case debt ratioseven more distinct (fig 42) While all country more than double

categories achieve some growth in the basecase (marginally in low-income Africa) most The analysis of this section illustrates vividly groupings and countries have declining per the tifference between the debt-constrainedcapita incomes under the full adjustment case case and the nonconstrained cases Logical

The differences between the import and consistent projections of the implications

performance under the different scenarios is

of the current situation show the seriousnesseven more pronounced than that of income

of the current uebt problem and the magnitudeof its cost Moreover in the constrainedThere is a reduction of $275 billion in imports cases the magnitudes of the cost may well beof developing countries between the base case llllderestimated We assumed a constantand the full adjustment case a 35-percent loss healthy growth rate in the world economy of(fig 43) The one-third adjustment case still 35 percent a year for the next 5 years Werepresents a $130-billion reduction in imports did not consider the interdependent effects onof developing countries Two-thirds of that world growth The magnitude of theloss is accounted for by the countries which adjustments associated with the fullare agricultural markets of the United States adjustment case which would affect aThe East Asian countries on the other hand do significant part of the world economy wouldnot seem to be as adversely affected by debt have a dampening effect on the economicThe adjustment process imposed on the performance of the rest of the worlddeveloping countries involves a realignment of Furthermore we assumed healthy growth inthe import-export trade balance that in turn the demand for the exports of the developingaffects US export markets countries and that markets in the OECDcountries will be available at the same timeAs these results show the different scenarios that the developing countries reduce theirhave a significant effect on trade However import demandthe key to the feasibility of any of theseoptions is whether it is reasonable to assumethat the debt required to sustain them can beforthcoming THE EFFECTS OF WORLD DEBT ONUS AGRICULTURAL EXPORT PROSPECTSThe nonconstrained base case involves a debtbuildup from the 1982 level of approximately

By 1982 the financial constraints to theinternational payments system were severe$700 billion to a total of $29 trillion in 1987This is more than a 400-percent increase in 5 enough to adversely affect trade in

years and would require growth rates in debt agricultural products especially imports todeveloping countries (in dollars) more so thanfar in excess of the ve~J rapid rates between in the nonagricultural trade Furthermore1973 and 1981 However even the one-thirdadjustment case requires growth in debt of US exports of agricultural products declined

more than 300 percent in 5 years Only in the more severely than total agricultural importsfull adjustment case is debt reduced by the to developing countries a significant loss inmarket shareend of the period and then only marginallyEven in this case some additional financing isrequired through 1985 Agricultural imports declined as a proportionof total imports for all 93 developing countries

20

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 30: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

------

--

-----------------------

Figure 4i

Change in Gross National Product 1982-87 Percent change

60

50 FUll adjustment

40 ~ 13 adjustment

30

20

10

o

-10

-20~-------------------______________________-J

Sudan Malaysia Singapore

Figure 42

Per Capita Income Projections Current dollars 1000r-----------__________________________________-

Basshy900 All developing countries 13

---shybullbull --------------- FUll800 --r=====

700

600

500

lOW-income Africa 400

- - -7-

300L-L-----__-L________L-______~________~______~~

83 84 85 86 87

Figure 43

Projected Imports

Billions of current dollars BOOr---------______________________________________~

700

13---_----shy600 All developing countries --shy500 --shy

400 Hj~middotmiddotmiddotmiddotbull~ - - -

~~~~~~turl __________ ---- shy

~ ----shy300 ===~~~~ 200 Eet Asle end ___ _

the PftCl~i~ubullbullbullbullbull~=7=7= 100

1982 83 84 85 86 87

Figure 44

Debt-to-Export Ratio All Developing Countries Ratio 5r---------______________________________________

4

J3--_----shy

3 -shy -----shy

-~---2 ---- -~ _~

O~~------L-------~--____~______-L______-L~

1982 83 84 85 86 87

Figur 45

Ratio of Agricultural Imports to Total Imports Percent 32~r-----------_______________________________

28 North Africa and Hiddle Eest

24

20

gt16 LON-incolte Africa __ --

--- - 12 bull bullbullbullbullbullbullbullbull - - - - 1 All dveloping ~ cDuntries--------- _---------shy

8 Letin Aaerice end --------- --shyCeribbsn --

4~~--~----~____~__~____~____~____~__~~

1974 75 76 7877 79 80 81 82

Figure 46

US Agricultural Exports as a Ratio of All Agricultural Imports Percent 40r-----~--------------______________________~

35 Hajor agricultural bullbullbullbullbullbullbullbullmiddotmiddotbullbullbullmiddotbullbullbullbullmiddotbullbullbullbullbullbull

bullbullbullbullbullbullbullm bullbullbullbullbullbullmiddot~~~middotmiddotmiddotmiddotmiddotbullbullbullmiddott Asia and

30 the Pacific

25

20 North Afric and

_--_--Middl Ebullbullt

i5

Low-inco Africe

10~~--~--__-L____~____~__~____~____~__~~

1974 75 76 77 78 79 80 81 82

21

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 31: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

shyamp-

from 1979 to 1981 (fig 45) However the financial conscraints felt by the developing world exacerbated the shrinkage of agricultural trade in the total of world trade For all developing countries imports of farm products measured in dollars fell from 97 percent of all external purchases in 1981 to 87 percent in 1982

The decline was particularly pronounced in our major agricultural market countries falluLg from 97 percent to 84 percent over the same period In Latin America the deterioration took place over a 2-year period with agricultural imports as a percentage 0deg total imports falling from 77 percent on average over 1979-81 to 57 percent in 1982 North Africa and the Middle East saw a reversal of the upward trend in 1982 as farm products fell from nearly 21 percent to less than 19 percent of all imports The dire food situation in low-income Africa in stark contrast to the changes in other regions is reflected in the sustained increase in purchases of footistuffs from abroad even in the face of deteriorating external conditions

The market share of US agricultural exports decreased from over 28 percent in 1980-81 to 255 percent in 1982 (fig 46)

The performance of US agricultural exports is exemplified by the declhle in low-income Africa where the United States lost market share despite that regions increase in overall agricultural purchases The market loss is particularly severe in the major agricultural markets and in North Africa and the Middle East Interestingly enough the uS share to the two Asian regions actually increased even Vtrith the exclusion of Taiwan

The authors estimated the probable effect of the three scenarios (baseline one-third adjustment and full adjustment) on US exports by assuming alternative US market shares

The following two cases were considered

Historic market share We assumed that the market share of agricultural imports achieved by the United States for each of the 93 countries in 1979 to 1981 will prevail from 1983 through 1987 This is somewhat optimistic given the historically high rates achieved dudng this period

especially in 1980 and 1981 However the decline in market share between 1981 and 1982 was probably caused by two factors which should change favorably over the coming 5 years the relative value of the US dollar and the high support prices for US agricultural products If the US dollar should decline towardS tte 1979-81 relative value a 35-percent decline in real terms from the highs achieved in January 1984 and if farm programs allow prices of US products to more closely reflect world prices the 1979-81 share will be achievable

1982 market share There was a significant drop in the market share of the US component of agricultural imports between 1979-81 and 1982

We also investigated the implications of projecting the 1982 market share through 1987 this is a pessimistic case We considered this as a lower bound estimate The real rate of increase in the value of the dollar in major agricultural markets slowed in 1983 and although increasing again in 1984 should begin to decrease in 1985 Support prices are not likely to remain at the same high levels

Agricultural imports as a percentage of total imports generally declined in the 93 countries during 1979-82 Agricultural imports from the United States also fell as a share of total agricultural imports Thus there is a significant difference in whether the US position will continue at the 1982 market share or drop further or regain its previousmarket share

Given these two alternative possibilities for US export performance over the next 5 years we generated six scenarios two projections each for the baseline the one-third adjustment and the full adjustment cases The total potential cost to the US agricultural export sector may then be examined as aggregates the projected rates of change and the differences between the projections

The difference in US agricultural exports between the baseline estimate the case with no financial constraints and the full adjustment case rea(hes a level of almost $74 billion by 1987 (using the 1979-81 market share) However even in 1983 the difference

22

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 32: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

i

i

------

---------

--- ---

----

~ - -

us Agricultural Exports and Export Projections1979-81 Market Share

F1gure 47

All Developing Countries and Major Borrowers Billions of current do~lars 21r-------____________________________________~_

18

~~ ~~

~~ ~~

i5 -~~

~~

12 ~~ ~-~~

bullbull Full --shy9

6

86 87

F1gure 48

Major Agricultural Markets and Middle-Income Oil Importers Billions of current dollars 18r-------________________________________________-

15 Base

13 12 --- --shy

~~~~~~~~~~-shy6 3L-L---~-----L--__L-__~____-L____~____L-__-L~

1979 80 81 82 83 84 85 86 87

Figure 50

Debt-Aff~cted Countries

Billions of current dollars

7

13 ~~

6 ~~~

-~~

5 -~~

~~ ~-

4 ~~~~~bull 3~L-__~____~____~____~____~____~____~__~~

1979 80 81 82 83 84 85 86 87

F1gure 5i

Latin America and Caribbean and Europe and Mediterranean aillions of rurrent dollars 10r---------____________________________________bull

9

8

7

13 __ - --shy6 --shy5

4 ~~

3

2

Je~ 1979 80 81 82 93 84 85 86 87

Figure 49

Middle-Income Oil Exporters and East ASia and the Pacific Billions of current dollars 10~--------______________________________________-

8

82 113 84 85 86 87

23

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 33: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

---------

--- --- -----

~ - _

us Agricultural Exports and ExportProjections 1982 Market Share

Figure 52

All Developing Countries and Major Borrowers Billions of dollars 20r-----------__________________________________-

16 BaBe All developingcountries

12

~-------~ 8

4~~--~--__~____~__~=-__~____~__~~__~~

1979 80 81 82 83 84 85 86 87

Figure 53

Major Agricultural Markets and East ASia and the Pacific Billions of dollars 14r-----------___________________________________

Major agricultural12 markets

13_---shy

bullbullbullbull-- Ful~ bull

6

~~__tp_-~i-~_I~_n_d__I~====~==-- 2~~--~--_______~____~____~____~____~__~_~

1979 80 81 82 83 84 85 86 87

Figure 54

Latin America and Caribbean Billions of dollars 8r-------------__________________________________-

7

Latin Aerica Bnd Caribbean

13 _-- -- ~ -----shy _----shy

3 _--------~O-----1979 80 81 82 83 84 85 86 87

24

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 34: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

is almost $5 billion The difference between the baseline and the one-third adjustment case is much less initially only $16 billion but would becOtile $35 billion by 1987

Figures 47 through 51 show the projections based on the 1979-81 market shares for US agricultural exports from 1983 to 1987 along with historical data from 1979-81 By 1987 the $74-billion difference between the baseline and the full adjustment case is dOminated by three country categories whose members overlap $67 billion is accollIlted for by the major borrowers $63 billion by major markets for US agricultural exports and $52 billion by the countries in Latin America Other significant losses in US exports of farm products appear for the debt-affected countries middle-incomp oil importers middle-income oil exporters and Europe and the Mediterranean East Asia and the Pacific retained the largest portion of the baseline estimates with 84 percent of the baseline remaining even under the full adjustmentscenario

The baseline case achieves the best overall performance in US agricultural exports with average annual growth over the 1983-87 period of more than 85 percent The one-third adjustment case shows average annual growth rates which are above 65 percent but which decline over the period The full adjustment case has a rather sharp decline in the first year of the projection the year with maximum adjustment Then annual growth rates increase to almost 775 percent by 1987 For the one-third adjustment case export levels are higher but with lower growth rates in the latter part of the period

Using the 1982 market share the difference between the baseline and the full adjustment scenario is $61 billion by 1987 The same major categories again dominate the potential loss major borrowers account for $5 billion major agricultural markets also $5 billion and Latin America $35 billion

The projections for both the 1979-81 and 1982 market shares reflect the declining portion of the baseline estimates achievable using either of the adjustment scenarios Figures 55-56 shows the proportion of the baseline for the 1982 share for the one-third and full adjuStment cases For the 93 countries the one-third adjustment implies a reduction from 89 to 83 percent of the baseline for the projectjon period In full adjustment the decline is less dramatic from 68 to below 66 percent of the baseline projections Adjustment to financial contraints implies a cumulative loss in ~xportpotential

Figure 55

US Agricultural Exports as a Percent of Baseline and 13 Adjustment Case Percent 100 r-----______________--

95 ------ South Asi--------

East ASia and ----- ___ _ 90 All developing the Pocific

~~~~~f~s Major agriCUltural

~~~~ts HOjor85 -~ borrowers

BO

75

70~--_~~____~___~___~ 19B3 B4 85 B6 B7In this case adjustments keep occurring over Figure 56

the projection period After the initial shock US AgriCUltural Exports as a Percent imposed by the full adjustment case debt is of Baseline and Full Adjustment Case less of a constraint to growth Thus trade Percent

90---______________--groWS more in line with the long-term East ASia andhistorical rate B5 --- - - ---- ----_________ ~~~_____ ~

South Asis BO The projections basad on the 1982 market share are less optimistic (figs 52-54) For 75

this case US agricultural exports are 70 All develOPing _-cDuntriesapproximately 15 percent less than in using = -____---_-shythe 1979-81 market shares Exports do not 65

Hajor sgriculturoleven achieve their 1982 level within the merkets Oebt-sffsctsd

1983-87 projection period in the full 55 ============~------_________~Co~uh~tr~ies~____60

adjustment scenario Lotin A~srice end MOjor50 ~ Ceribbron borrowers

45 1963 64 B5 B6 67

2S

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 35: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

---------

middot -

Latin American countries illustrate the greatest difference between the baseline and the one-third and full adjustment cases By 1987 the one-third adjustment value falls to 75 percent of the baseline In the two Asian groups not even the full adjustment case falls below 80 percent The full adjustment case in Latin America is the most severe with us exports projected at less than 50 percent of baseline estimates The only two other regional groupings for which the full adjustment cases drop below 60 percent of the base in ~987 are major bon-owers and debt-affected countries Furthermore the latter category also has a one-third ~ adjustment case of below 80 percent of the base in 1987 Somewhat more encouraging major agricultural markets do not shov much difference from the 93 developing countries as a whole

The difference between the 1979-81 market share estimates and the 1982 market share estimates represents the effect of the change in US exchange rates and loan levels over the period A return to the 1979-81 average exchange rate and loan level would lead to approximately $25 billion more exports than the 1982 market share

Figures 57-63 present the maximum difference between possible outcomes by comparing the flti79-81 market share baseline case against the 1982 market share full adjustment case The export loss would increase from $65 billion to $96 billion over the period 1983-87 for all 93 developing countries

Once again the most severely affected region is Latin America (fig 63) with a potential

us Agricultural Exports 1979-81 and 1982 Base Figure 57

AII Developing Countries Billions of current dollars 25------------------_

20 1979-Bl BeB~

15

---_ - ------shy10 - - -1982 Full BdjuBtlftent

5

0

-5

-10 1979 80 81 82 83 84 B5 86 87

Figure 5B

Middle-Income Oil Exporters Billions of current dollars 10~-----------------

8

6 ----_ 4 - - - - j~2 Full adjustment

2

o bullbull Maxioum dif ference-2 shy

-4

1979 80 81 82 83 84 85 86 87

Figure 59

Major Borrowers Billions of current dollars 15r--------------______~

1979-Bl~ 10

~ -----------shy5 ~--------

19B2 Full adj ustment

o

Maximum difference

-5

------------shy1979 80 81 82 83 84 85 86 87

Figure 60

Debt-Affected Countries Billions of current dollars

9

6

----------shy- - - shy jge U11 adjustment

3

o

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference -3

shy_6~__L-_i-_~_-L_-l___~__L-_~

1979 80 81 82 83 84 85 86 87

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 36: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

--------- ----

-----

-i market loss equivalent to two-thirds of baseline estimates Other country groupings THE US RESPONSE with a 50-percent potentia110ss in US HOW TO MINIMIZE OUR COSTS exports are middle-income oil exporters major borrowers debt-affected countries and We need to know how the United States major agricultural markets Finance does not through policies and programs can reduce the seem to be a serious trade constraint for the adjustment costs of the debtor countries while East Asia and Pacific region at the same time increase our prospects for

agricultural export growth Because the 93 developing countries make up approximately one-third of the US export We draw the follOwing conclusions from our market for agricultural commodities their analysis import performance (our export potential) is highly significant for US agricultural export Dampening of Growth and Trade performance These countries have the potential to increase or decrease total US The current debt situation can severely reduce agricultural exports by almost 20 percent In both tradt and growth vf the developingaddition probable export losses are countries Countries such as Brazil Mexico concentrated in countries most severely and Korea are paying a heavy price for their constrained by external finances The degree adjustment right now Brazil has been to which such losses are realized depends uneergoing adjustment since 1980 Brazilian heavily on the scope and types of response by per capita income decreased 15 percentthe United States between 1980 and 1982 Mexican per capita Figure 6i income has declined 25 percent since 1981 Major Agricultural Markets

f Korea which recognized the problem early Billions of current dollars spent 1981 and 1982 adjusting Per capita

20 incomes in Bolivia and ChUe have declined by as much as 50 percent Yugoslavian per capita

15 j979-81 Base case income may have fallen by as much as 25

percent in 1983 10

- - -1982 Full adjustment The Need for Adiustment 5

The current situation only partly reflects debt jshya levels The fundamental disequilibrium in the

bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Maximum difference balance of payments systems of these -5 countries is more significant Large debt is as much a symptom as a problem Debt

-10 1979 80 81 82 83 84 85 86 87

Figure 62 Figure 63East Asia and the Pacific Latin America and Caribbean

Billions of current dollars 6 ____________________~ Billions of current dollars

10 __________________________~

------8

1979-81 Base case

4 6

4

~ -19B2 Full adjustment2 2

a

-2 a MaXimum di f ference bullbull

bullbull~~~~~~~~~~~ -4

-6

-2~--~--~L---L---~--~--~__~__~7 -81979 80 81 B2 83 84 85 86 8 ~--~----~--~__L-_~__~__~__~~

1979 80 81 82 83 84 85 86 87 f I sect 27 ~ I

___ JI l

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 37: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

accumulation is both a cause of and aresult of balance of payments deficits National economic policies have encouraged a situation where domestic prices and resources do not reflect scarcity values Unless this situation is corrected no realistic amount of additional financing will solve the problem

Rather additional financing under these circumstances would simply postpone dealing with what could be a far worse problem

Financial Restructurfug

Restructuring existing debt must accompany significant adjustment efforts by the debtor countries It is necessary to reduce the debt burden dudng the period of adjustment when the debtor countries will be realigning their imports and exports It is also necessary to provide a degree of payment certainty by restricting the impact of upward movements of interest rates on the payment terms of debtor countries

Restructuring and Protectionism

Long-term success in solving the international debt problem can occur only if the adjustments and sacrifices of the debtor countries result in a realignment of the import-to-export ratios This means there must be a market for the new exports If protectionist measures are undertaken to prevent increases in exports of the developing countries from being realized then there is the real potential for a breakdown in the international finances and trading systems

financing and Adjustment

Nonetheless although providing additional financing will not necessarily solve the problem It could help reduce the cost of adjustment Financing can be used as a means for encouraging rapid adjustment and renewed growth Although the in1ltial cost of the full adjustment scenario is higher the subsequent growth rate is also higher In other words additional financing can be used to put off adjustment encouraging continued misallocation of investment and consumption or it can be used as a means for undertaking the investments necessary for rapid adjustment for the benefit of all Which of these occurs depends on how we structure our

financing programs and how the debtor countries manage the funds

Financing and US Exports

In the current world environment with large debt overhanging growth and trade financing is a key to generating an export stream approximating that of the baseline case 1f financing can generate exports at a rate of 30 to 50 percmlt of the amount--that is $10 million in aid generates $3 to $5 million in exports-then an initial $6 to $9 billion rising to $15 to $20 bUlion should generate the baseline export projection However more research is necessary to validate this initial estimate of the export-geperating capacity of additional financing because we have assumed that there will be no change in the structural links between developing countlies growth patterns and their trade patterns

Financing and Repayment

Under the simulation most of the countries can manage the adjustment without unacceptable income losses A rapid adjustment will generate high levels of growth implying an ability to repay the loans Furthermore considering that income multiplies the effect of export sales and the subsequent tax revenue generated by them positive benefit-to-cost ratios should result from a significant export finance program However current programs with short-term payment requirements of only 3 years or less may not adequately reflect the required loan structure under current conditions

The current world debt situation not only can significantly affect growth in developing countries but also can have an even greater effect on developing countries trade The future for US agricultural trade is dim if action is not taken to counter the potential losses to trade especially because of the heavy indebtedness of our major trading partners However financing can be used properly both to encourage adjustment to international trade imbalances and to help support our export trade significantly improving intermediate-term prospects However the implications of the debt problem for the growth and trade of developing countries appear to be J significant if not major constraint to be dealt with over the coming years

28

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 38: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

~-

-~ -on

BIBLIOGRAPHY

1 Abbott Philip Foreign Exchange Constraints to Trade and Development FAER-209 Nov 1984 US Dept Agr Econ Res Servo

2 Bank for International Settlements Maturity Distribution of International Bank Lending Various issues

3 Barth James and Joseph Pelgman International Debt Conflict and Resolution Fairfax VA George lvtason University Jan 1984 gt

4 Cline William R Internationnl Debt and the Stability of the World Economy Cambridge MA MIT Press Sept 1983

5 Policy Alternatives for a New International EconOmic Order New York Praeger Publishers 1979

6 Eaton Jonathan and Mark Gersovitz Managing International Risk New York Cambridge U1iversity Press 1981

7 Executive Office of the President EconOmic Report of the President 1984

8 Feldstein Martin International Debt Policy Council of Economic Advisors May 1984

9 Food and Agriculture Organization of the United Nations Agricultural Trade Statistics Rome 1983

10 __ Trade Yearbook 1973-83 Rome ArulUal issues

11 Gerrard Chistopher and Terry Roe Government Intervention in Food Grain Markets Journal of Development EconOmics Vol 12 No 1 (1983) 109-32

12 Hayami Yujiro and VW Ruttan Agricultural Development An International Perspective Baltimore Johns Hopkins University Press 1971

13 International Monetary Fund Balance of PaYments 1978-83 Washington DC Annual issues

14 External Debt In Perspective Washington DC 1983

15 Interest Rate Policies in Developing Countries Occasional Paper 22 Washington DC Oct 1983

16 Recent Multilateral Debt Resti1iCtUring with Official and Bank Creditors Occasional Paper 25 Washington DC Dec 1983

17 World EconOmic Outlook 1984 Washington DC 1984

18 International Financial Statistics Washjngton DC 1984

19 Jabara Cathy Terms of Trade for Developing Countries FAER-161 US Dept Agr Econ Res Serv Nov 1980

20 Khan MS and M Knight Sources of Payments Problems in LDCs Finance and Development Vol 20 No4 (Dec1983)2-5

21 McKinnon Ronald 1 Money and Capital in EconOmic Development Washington DC The Brookings Institution 1973

22 Organization for EconOmic Cooperation and Development Debt Problems of Developing Countries Paris 1974

23 External Debt of DevelopingCountries Paris 1982

24 Shane Mathew Capital Markets and the Dynamic of Growth American EconOmic Review Vo164 No1 (Mar 1973) 162-69

25 Shane Mathew and David Stallings Trade and Growth of Developing Countries Under Financial Constraint Staff Report AGES840519 US Dept Agr Econ Res Serv June 1984

26 Shane Mathew and Mervin Yetley Debt Situation Sets the Stage for a Food Crisis US Dept Agr For Agr Serv Jan 1985forthcorrrlng

29

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 39: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis

I

~ gtW

27 Williams Richard and others International Capital Markets Vol 23 Washington DC International Monetary Fund1983

28 World Bank World Debt Tables Washington DC Jan 1984

29 World Development Report 1983 New York Oxford University Press 1983

t J

30

Page 40: Financial Constraints to Trade and Growth: The World Debt ...ageconsearch.umn.edu/bitstream/147532/2/faer211.pdf · financial constraints to trade and growth: the world debt crisis